Hello, thank you for your time and effort in writing this proposal. In the current form, we have decided to voice our opinion against it and strongly think the proposal shouldn’t pass.
TVL argumentation
We want to raise an alarm about using the dollar-denominated TVL to prove the success of the season 2 reward program.
During season 2 which lasted from January 1, 2024, to March 31, 2024, the dollar-denominated TVL had grown because SOL experienced nearly 100% price appreciation, but the actual SOL deposited to the Marinade Liquid Staking product (mSOL) decreased by ~9%, from 7.09M SOL to 6.42M SOL.
We believe there was no bad intent in using TVL as you did, but the whole point the proposal made about the success of the Season 2 based on the dollar-denominated TVL growth, is therefore simply false.
What we would prefer to see in the future is the SOL-denominated TVL, and to demonstrate the success or failure, it’s better to benchmark against the competing LST protocols (% growth comparison).
Reward size
Why did you choose 50M tokens as the reward (in fact 53M, incl. Solend’s tokens), what’s the reasoning behind this number?
The reward implies roughly 19% dilution, not counting contributor rewards for a potential TVL milestone hit. In absolute numbers at the current price of $0.1973 (according to Coingecko), this means ~$9.87M of protocol expenses in 5 months, unlocked at roughly the same time, if following the same pattern from Season 1 and 2 with unlocking after 30 days.
Around 20 days of volume on all exchanges (based on Coingecko’s volume after removing BitMart’s volume). MNDE token can be considered highly illiquid at this moment and this fact needs to be taken into account.
The general idea for any protocol spending is that the positive effect of protocol expenses must be larger than the negative effect of the dilution of tokenholders.
Deepening the liquidity
This is not true as mSOL currently holds about 6.19M SOL, jitoSOL comprises 9.92M SOL (1.6x). Selling $5M worth of mSOL in one order through Jupiter results in ~1.027% price impact, while the same amount for jitoSOL accounts for ~0.8476% price impact. This implies that jitoSOL is 60% bigger, but its liquidity near the peg price is only 17% better.
If we go further below the peg and search for the liquidity, then selling $10M worth results in ~8.8811% and ~1.6195%, respectively, the gap widens, but most trading happens near the peg.
While in theory deepening the liquidity of mSOL could be a good idea, we need to think in measurable KPIs and do a cost-benefit analysis of decisions that involve the allocation of Marinade’s governance token, MNDE.
Marinade should define certain measurable goals (KPIs) for any of their incentive programs and also explain why they think it’s important. Are we trying to reach a certain TVL, DEX slippage, or something else? Are the effects long-lasting or just temporary?
Moving incentives
The aforementioned move from looping on lending markets to looping on DEX pools through new incentives and an LP token, as we understand the proposal, simply moves liquidity from “less useful” liquidity on lending pools to “more useful” liquidity on DEX pools.
We are not convinced that this is a long-term solution for deepening the DEX liquidity, as once the incentive program finishes, the yield farmers will simply move back to looping on lending markets for higher yield. In other words, when we actually need the liquidity, it might not be there.
Looping in DeFi is another way of saying you’re getting leverage and the more you loop, the closer you are to your liquidation level. The fact that mSOL is already used this way, is bad for the protocol, because during severe market volatility, deep mSOL depegging could occur more easily, caused by liquidations.
Although you say that mSOL is currently hardpegged on current Solana’s lending protocols, we’re not sure about all the possible consequences of relying on such a possibly temporary measure by these protocols.
You also don’t mention if a similar hardpegging rule could be applied to the potential new mSOL-SOL LP token lending market used for looping, or in other words if moving the incentives actually bring liquidation risk to mSOL, which, according to you, seems to be absent in the current mSOL lending markets.
Main questions
What’s the reasoning behind the size of the rewards?
What are the KPIs, i.e. what are you trying to accomplish explained by quantitative metrics?
How much should the LST really be robust for a temporary depegging?
Are the effects of the incentive program long-lasting, or just temporary?
Is it worth paying significant MNDE subsidies for an increase of liquidity (cost-benefit analysis)?
Does DEX looping via the new mSOL-SOL LP token on lending markets bring the liquidation risk and thus making mSOL more fragile in case of severe market conditions?